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Close-Up: Will others follow Coke's remuneration model?

As Coca-Cola brings its 'value-based' compensation system to the UK, are other big clients likely to copy it, John Tylee asks.

Ten months after Coca-Cola unveiled its plan to impose a "value-based"
compensation model on its agencies across the world, which reached the
UK this month, the best that can be said of it is that the jury is still
out.

The worst - in the words of a leading pitch consultant - is that the
scheme is so "downright barmy" that no other big client in their right
mind would copy it.

The model, still being rolled out until it covers all Coke's creative
and media agency relationships by 2011, goes much further than any
payment-by-results incentive that now forms a part of a significant
number of agreements between agencies and clients.

In short, Coke agencies are being promised profit mark-ups of up to 30
per cent if certain targets are met. If they aren't, agencies will
recoup nothing more than their costs. It also means greater uncertainty
for roster shops accustomed to knowing what profits are coming in before
the creative work goes out.

The world's sixth-largest advertiser, with an annual spend of around
£2 billion, not only wants agencies to truly earn their money but
to spark a worldwide movement among clients to take a similar path.

The Coke system overturns the usual definition of value based on how
many agency staff and how many hours are needed to complete the work.
Under its arrangement, value is determined by a range of factors -
including a campaign's strategic importance and the talent involved.

According to a senior manager at a Coke network agency: "Each brand has
a different matrix. For example, Diet Coke compensation is linked to
where the creative work runs. That means the more countries that run an
agency's work, the bigger the fee."

At the moment, the main concern among Coke's agencies is about the time
being taken to find out if the new model works. The company says it will
be making no comment on the initiative - or the thinking behind it -
until the first full year's data has been reviewed.

"Coke is paranoid about anyone knowing too much about this," a source
within one of its media agencies confides. "The company drives as hard a
bargain as any client I've ever come across."

"The difficulty for us is the large sums of money involved and the long
delay before we know what the results are," another Coke agency insider
explains. "So it may well be a long time before we get any
profitability."

This, however, may be the least of the scheme's shortcomings, a UK
intermediary suggests. "The plan is too leveraged and too risky," he
says. "I fear agencies will be conned into going along with it against
all their instincts."

He adds: "Coke seems to be hoping that by doing this it will become a
more formidable client.

But agencies will always aim to do their best possible work for Coke.
And it's not as though there's any shortage of good people wanting to
work on its business."

The move reflects what Debbie Morrison, the ISBA director of consultancy
and best practice, says has become a relentless search by clients for
new systems of remunerating agencies.

Last year, Procter & Gamble, frustrated at not being able to react to
shifting media trends because its budget was locked into a fixed fee
with a single agency, began evolving its so-called brand agency leader
model. This sees one executive and one agency put in charge of a brand's
entire marketing.

Stephen Woodford, the DDB UK chief executive, believes the trend towards
more payment by results will accelerate - and agencies shouldn't be
frightened of it because it usually stops at between 10 and 15 per cent
of an agency's remuneration because clients have not usually had the
appetite to go further. He says: "I think this proportion will increase
- and good agencies should be prepared to stand or fall on the business
contribution they make."

But he warns: "If agencies are putting revenue at risk, there has to be
a bigger upside. They have relatively high fixed costs in terms of
people and if revenues become less predictable, they will need to reduce
those costs and rely on more freelance help. That wouldn't be a good
thing."

Ian Armstrong, Honda's head of customer communications, has similar
misgivings. The car manufacturer has operated a scheme for the past six
years under which some of its agencies are paid bonuses if they deliver
against certain agreed matrices.

"Coke obviously believes its scheme is right for its business but it
would be a step too far for us," he says. "The danger is that an agency
is left too exposed financially and that it tries to cut people costs to
sustain its margins and the client doesn't get the most appropriate
people on his business."

Guy Hayward, the JWT UK group chief executive, says: "Such a scheme can
only work if the matrix is fair about what the agency can influence. We
could spend a month making a TV commercial that will have value to a
client for the next ten years - but we're only paid for a month's
work."

There is also a thought that the trend towards new remuneration models
will require agencies to change their old skillsets. And while adland
is, on the whole, open to this idea, there are fears that the right
people to implement it are difficult to find.

Nigel Jones, the Publicis Groupe UK chief executive, says: "In the old
days, you had account people who were brilliant at selling creative work
but couldn't read a balance sheet, while there were others who were
great business people but wouldn't recognise a great ad if it bit them.
Now we need to have those skills within a single person - and those
people are few and far between."

But despite the many naysayers, the ever-optimistic advertising industry
has thrown up some people who are excited at the idea of the drive
towards a full-blown system of payment by results by major clients, and
that is the creatives.

Gerry Moira, Euro RSCG London's chairman and director of creativity,
says: "It's good for clients and agencies to be in it together as long
as everybody is agreed about the goals."

Leon Jaume, the WCRS executive creative director, agrees. "Success is
very difficult to measure and it would be wrong for a client to transfer
all responsibility for success or failure on to an agency," he argues.
"But payment by results can sharpen an agency's creativity and I like
that challenge."

Others believe that Coke's plan may move on even further and pave the
way for clients to move beyond just payment by results and offer their
agencies a direct stake in their business.

Publicis has been working on the big-budget launch of a new product from
an as yet unnamed client, with the agency taking a share of future
sales.

Jones says: "The incentive for us is to put in the extra hours on the
business. But the downside of such an arrangement is the lack of upfront
investment which can make it difficult for some agencies to take
business on this basis."

Nevertheless, Morrison detects no client stampede to emulate Coke. She
says: "I think it's more likely that clients will take elements of what
Coke is doing and adapt them to suit their own agency
relationships."

Proceed with caution is the best advice to agencies working on the
payment-by-results model. Not only must firm ground rules be agreed
between both parties about what constitutes value and how it should be
rewarded, but no agency promised jam tomorrow should be left with too
little jam today.

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